By Neland Nobel

Written by Neland Nobel

If you have been following our stock market commentaries, you may recall that we felt the market was ready for a correction of some of its recent excesses.  Telltale signs began to appear in December as the market reached new highs repeatedly, but the ratio of advancing to declining issues decreased.  The market was losing internal strength, even as it pressed towards new highs.

We suggested that a drop to the 5,000 level on the S&P was probable and that it would likely bounce upward and then retest the same bottoming zone.  The market cooperated and fell below 5,000 on an intraday basis, but it did not close below 5,000.

We suggested that if the market failed to bounce and hold the low around 5,000, we could drop to the area of 4,200.  If the market both held and then advanced with good breadth, we likely would rise back to the 200-day moving average around 5,700.

The low came with an incredibly severe washout in both sentiment and momentum.  We thought the reading of 8 on the CNN Fear and Greed gauge was low, but we actually printed several times at 4, a low reading we can’t recall seeing before.

In the chart above, you can see the multiple tops from mid-December to mid-February. By the first week in March, the short-term moving averages crossed and broke to the downside. Then the decline accelerated.  MACD dropped but is turning upward, and so is relative strength (top panel).  Not shown has been the excellent breadth in this second bounce off the low.  The red 200-day moving average is being crossed by the 50-day, not usually a good thing.  However, note that the 200-day is flat and has not yet turned downward.  Hopefully, it won’t.

Most importantly, the test was successful, and the bounce contained a massive improvement in breadth.  Breadth is a measure of what percentage of stocks are participating in the rally.  If the bounce off the lows had been feeble, with just the MAG-7 advancing, we would say that’s not good.  But we got several days where more than 80% of issues participated in the rally.  That is terrific.  So, terrific! It has triggered a rare Zweig thrust, an indicator named after the late Martin Zweig. Those of you who might remember Wall Street Week with Louis Rukeyser will recall him.

Jason Goepfert of Sentiment Trader, who keeps a record of such events, says that returns after a Zweig Thrust have always been good, usually in the range of 20% gains.

Mr. Goepfert is responsible for his own calls on the market, and we’re not sure we share all of his enthusiasm. But he has an excellent record, and so does this indicator, so take it for what it is worth.

We also practice a more ancient form of charting, the point and figure method.  On April 24, 2025, we got a breakout of a double top and a buy signal under this methodology. That adds additional evidence that there are good odds the lows have been seen, at least for a while.

Now we’ll have to see if the market has enough momentum to reach, and then surpass, 5,700.

Before you pile back into the market with your maximum allowable allocation, though, remember this modest and short correction has not done very much to adjust the market to more reasonable price levels.  By just about every standard metric, the market remains expensive. In addition, there have been signs, at least from sectors of the economy, that things are slowing down.

The International Monetary Fund (IMF) has indeed reduced its global growth forecast for 2025 to 2.8%, down from an earlier estimate of 3.3%. This downgrade, outlined in the IMF’s April 2025 World Economic Outlook, is primarily attributed to escalating trade tensions, particularly due to U.S. tariffs reaching century-high levels, which are acting as a negative supply shock. The report highlights a significant slowdown in global trade growth to 1.7% in 2025, alongside increased policy uncertainty and higher inflation projections. Global headline inflation is expected to decline more slowly, to 4.3% in 2025. The U.S. growth forecast was cut to 1.8% from 2.7%.

If all this turns out to be true, earnings estimates will have to be downgraded.

And, need we say, the market is unusually volatile. It is currently having a devil of a time figuring out what Donald Trump is trying to do.

Is he simply uninformed about the role tariffs play in world trade, or is all this on-and-off rhetoric simply part of his “art of the deal?”  He also seems to be going back and forth on Jerome Powell at the Federal Reserve. 

Trump has been right about many things that have happened in the past; we do not dismiss him, as others in the financial press seem to do. However, other than using his erratic actions as a strategy, we neither approve of nor fully understand them.

We must also admit that once he opened this can of worms, we had no idea that trade relationships would prove as unfair as they have been revealed to be.  Our friends treat us almost as severely as our adversaries. And in contrast to our free market friends, we don’t think trade relationships can remain this bad, and have America prosper.  We don’t support the status quo, even if it upsets the financial markets. Those who dismiss the problem by slavishly pursuing accounting identities are missing the point.

The US trading practices have not been perfect, but our tariffs are much lower than those of most of our trading partners.  These trade practices have been more aligned with free trade principles than those of many of our trading partners, especially China, which has pursued outright mercantilist policies. You can’t play a fair game of any sort if only one side adheres to the rules.

Libertarian purists suggest that we benefit from free trade, even if the countries we trade with do not practice it.  They believe in “unilateral free trade.”

To us, that is like practicing unilateral pacifism.  It will not work with countries that believe in force.  However, by the time you discover how much you have lost, you may not have time or resources to reverse course.

No country can leave itself with that kind of existential vulnerability. The basic role of government is to protect its people, their property, freedom, safety, and opportunities. To abandon that basic function and responsibility to be the purist practitioner of economic theory seems like a foolish trade-off.

Trump may get some good trade deals, and the market will rally.  He may fail and bluster, and the markets will falter.  In short, we have entered a process that is uncharted and likely to continue the extreme volatility for many months ahead.  We like the breadth, to be sure, but there’s more of the story yet to come.

Because of that, we bought only modestly on the dip and will remain with a conservative allocation to equities.  We are holding onto our gold, although we believe it is in a corrective phase. We think both the metal and, especially, the mining shares still have significantly more potential ahead. We expect gold mining companies to report strong earnings and free cash flow, and they will eventually get noticed.

In summary, the good news is we held the 5,000 low, and the second test created a bounce with good breadth.  We should work higher in the near term.  However, the kerfuffle over trade is not over, and the status quo can’t stand.

If you’re older, keep a larger-than-normal cash allocation in the portfolio to provide ballast against ongoing volatility.

 

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